Claim No. CFI 003/2022
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
(1) AIG INTERNATIONAL GROUP UK LIMITED (AS TRANSFEREE OF AIG EUROPE LIMITED)
(2) MARKEL SYNDICATE MANAGEMENT LIMITED
(3) TALBOT UNDERWRITING LIMITED
(4) BERKSHIRE HATHAWAY INTERNATIONAL INSURANCE LTD
(5) LIBERTY MUTUAL INSURANCE EUROPE SE
(6) ANV CORPORATE NAME LIMITED
(7) ARCH INSURANCE (UK) LIMITED
Claimants
and
QATAR INSURANCE COMPANY (BRANCH OF A FOREIGN COMPANY)
Defendant
JUDGMENT OF JUSTICE LORD ANGUS GLENNIE
| Trial: | 7 November 2023 – 9 November 2023 |
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| Counsel: | Mr. Nicholas Craig KC instructed by Clyde & Co LLP for the Claimants
Ms. Zoe O’Sullivan KC instructed by Ghaffari International Disputes LTD for the Defendant |
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| Judgment: | 26 February 2024 |
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UPON the Part 7 Claim Form dated 14 January 2022
AND UPON reviewing all relevant material added onto the Court file
AND UPON reviewing the Rules of the DIFC Courts (the “RDC”)
AND UPON hearing Counsel for the Claimants and Counsel for the Defendant at the Trial held before me from 7 November 2023 to 9 November 2023 (the “Trial”)
IT IS HEREBY ORDERED THAT:
1. The Claimants’ claim fails and is dismissed.
2. The Defendant’s counterclaim succeeds in full.
3. The parties shall use their best efforts to agree the terms of the monetary judgment, to include simple interest at a commercial rate up to the date of this judgment.
4. Judgment debt interest shall run at 9% per annum from the date of this judgment until the date of full payment.
5. The Claimants shall pay the Defendant’s costs of this action on the standard basis, to be assessed by the Registrar if not agreed.
Issued by:
Delvin Sumo
Assistant Registrar
Date of Issue: 26 February 2024
At: 3pm
SCHEDULE OF REASONS
Introduction
1. This case raises a single issue of law requiring the Court to interpret US-Iran sanctions and determine whether they would prohibit payment by the Claimants to the Defendant under various policies of reinsurance. The Claimants in this case seek, in effect, a declaration of non-liability. They say that payment of the sums claimed by the Defendant would expose them to a sanction, prohibition or restriction under the USIran sanctions regime contained in the Iran Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (“ITSR”). The Defendant disputes this and counterclaims for the sums which they contend to be due to them under the reinsurance contracts. There is no dispute of fact between the parties. The only evidence called was from US lawyers, one for each party.
The parties
2. The Claimants are all insurance and re-insurance companies incorporated in the UK.
3. Each of the Claimants is ultimately wholly-owned by a US company: the First and Third Claimants by AIG Inc; the Second Claimant by Markel Corporation; the Fourth Claimant by Berkshire Hathaway Inc; the Fifth Claimant by Liberty Mutual Holding Company Inc; the Sixth Claimant by Evergreen Parent GP LLC; and the Seventh Claimant by Arch Capital Group Ltd. There is no dispute that each of the Claimants is therefore either a US person or is “owned and controlled” by a US person within the meaning of ITSR and in particular ITSR §560.314 and §560.215(b)(1). This fact is critical in this litigation. For brevity I shall refer to them as being “US owned”.
4. The Defendant (“QIC”) is the Dubai branch of QIC Insurance Co., a company established in Qatar. QIC is licensed to operate as an insurer within the UAE.
The Original Insurance
5. In November 2014, United Arab Bank (the “Bank”), which is licensed and carries on business in Sharjah, UAE, entered into an insurance contract with QIC in terms of which QIC insured the Bank against a wide range of risks, including the criminal acts of its employees and electronic and computer crime during the period 30 November 2014 to 29 November 2015 (the “Original Policy”). Nothing turns on the precise wording of the Original Policy.
The Reinsurance Policies
6. QIC ceded to reinsurers all of the risks under the Original Policy (initially it retained 5% of the risk, but this was reduced to 0% by subsequent endorsements so that ultimately QIC retained none of the risk for itself). The reinsurers included the Claimants. Other reinsurers such as Swiss Re and Zurich Insurance Co (DIFC Branch) were international or regional but were not US owned.
7. The reinsurance was undertaken by the reinsurers on a facultative basis by way of a five-layer reinsurance programme structured as follows:
| Primary Layer (AED 5 million) |
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| 1 | Swiss Re | 54.5454 |
| 2. | AIG (the First Claimant) | 9.0909 |
| 3 | Zurich Insurance Co. (DIFC Branch) | 22.7273 |
| 4 | Liberty (the Fifth Claimant) | 5.4545 |
| 5 | ANV (the Sixth Claimant) | 1.3636 |
| 6 | Arch (the Seventh Claimant) | 0.9205 |
| 7 | Dual Corporate Risks (on behalf of other reinsurers) | 5.8978 |
| First Excess Layer (AED 2 million excess of AED 5 million) |
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| 8 | Swiss Re | 100 |
| Second Excess Layer (AED 8 million excess of AED 7 million) |
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| 9 | Zurich Insurance Co. (DIFC Branch) | 56.8182 |
| 10 | Talbot (the Third Claimant) | 27.2727 |
| 11 | Markel (the Second Claimant) | 9.0909 |
| 12 | Berkshire Hathaway (the Fourth Claimant) | 6.8182 |
| Third Excess Layer (AED 15 million excess of AED 15 million) |
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| 13 | AIG (the First Claimant) | 30 |
| 14 | Dual Corporate Risks (on behalf of other reinsurers) | 21.6834 |
| 15 | Zurich Insurance Co. (DIFC Branch) | 20 |
| 16 | Liberty (the Fifth Claimant) | 20 |
| 17 | ANV (the Sixth Claimant) | 5 |
| 18 | Arch (the Seventh Claimant) | 3.3166 |
| Fourth Excess Layer (AED 20 million excess of AED 30 million) |
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| 19 | Talbot (the Third Claimant) | 27.2727 |
| 20 | Zurich Insurance Co. (DIFC Branch) | 27.2727 |
| 21 | AXA-XL | 22.7273 |
| 22 | Dual Corporate Risks (on behalf of other reinsurers) | 9.8296 |
| 23 | Liberty (the Fifth Claimant) | 9.0909 |
| 24 | ANV (the Sixth Claimant) | 2.2727 |
| 25 | Arch (the Seventh Claimant) | 1.5341 |
The Claimants in these proceedings are identified in bold. As stated above, other reinsurers in the various layers, not in bold, do not fall within the description: “ultimately wholly owned by a US Company” and, where necessary, are referred to in this judgment as “not US owned”. They have not participated in these proceedings. Swiss Re, which is not a Claimant, was the only re-insurer under the First Excess Layer and no claim is made in these proceedings in relation to that contract.
8. In terms of the various Reinsurance Policies each reinsurer, including the Claimants, agreed that:
“In consideration of the premium charged, and subject to the terms and conditions of this Contract as set out in the slip and its attachments and/or endorsements applicable thereto, this contract reinsures the Reinsured’s interest in payments made within the terms of the Original Policy.”
9. Each of the Reinsurance Policies included a Proportional Facultative Reinsurance Clause providinginter aliathat:
“... The Underwriters, members of the Syndicate(s) referred to in the slip, hereby bind themselves severally and not jointly, each for his own part and not one for another and therefore each of the Underwriters ... shall be liable only for his own share of his syndicate's proportion of any loss payable under this Contract. ...”
Under the heading “Security Details”, another clause in each of the Reinsurance Policies re-iterated the point that the reinsurer’s liability was several and not joint.
10. Each of the Reinsurance Policies also included a Sanction Limitation & Exclusion Clause (the “Sanctions Clause”) in the following terms:
“SANCTION LIMITATION & EXCLUSION CLAUSE
No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.”
The circumstances giving rise to the claim
11. Among the Bank’s customers was a company called Alpine Enterprises Trading Co Ltd (“Alpine”). Alpine is incorporated in Hong Kong. It is owned by three Iranian nationals (the “Iranian nationals”) who are ordinarily resident in Iran and therefore subject to the jurisdiction of the Government of Iran.
12. In about March 2015, the sum of AED 36,572,317.88 was misappropriated from Alpine’s account with the Bank by one of the Bank’s employees (Mr Faisal Mohamed Khair Al Najar) acting in collusion with a third party (Mr Abdulla Meheiri). According to the judgment of the Court of Cassation dated 17 January 2022 in civil proceedings brought by the Bank, this was done by the use of an Ajman company owned by Mr Meheiri with a name very similar to Alpine.
13. On 6 May 2015, Alpine complained to the Bank that substantial funds on its account had been fraudulently transferred away.
14. On 27 August 2015, the Bank notified QIC of a potential claim under the Original Policy.
15. In September 2015, Alpine issued civil proceedings against the Bank in the Sharjah Courts to recover its loss consequent upon the misappropriation. The Bank initially defended those proceedings.
16. In about February 2016, Mr Al Najar and Mr Meheiri were arrested and subsequently charged (in Sharjah) in respect of the misappropriation. On 29 August 2017, the Sharjah Penal Court convicted them both. Their appeals against conviction were dismissed.
17. Following the convictions, the Bank agreed to settle the civil proceedings brought against it by Alpine by paying the sum of AED 38,526,305.50 to Alpine. That sum included the principal sum plus Alpine’s legal fees, compensation and court fees.
The claim by the Bank under the Original Policy
18. The Bank sought an indemnity from QIC under the Original Policy.
19. Before indemnifying the Bank, QIC sought an indemnity from reinsurers under the Reinsurance Contracts. Three non-US owned reinsurers (Swiss Re, Zurich DIFC and AXA XL, all of whom are based in the EU), agreed that the Reinsurance Policies responded to QIC’s claim. They have paid their share of the loss amounting to AED 17,172,243.75. (The position of Dual Corporate Risks and the insurers who they represented was not explained but nothing turns on that.)
20. QIC paid those sums to the Bank. However, it did not initially indemnify the Bank in the full amount demanded. The Bank brought separate proceedings in Dubai against QIC to recover the balance of the sums claimed. The UAE Court of Cassation found in favour of the Bank by a judgment dated 17 January 2022; and QIC was found liable to indemnify the Bank in the amount of AED 18,623,154.13 (in addition to the sums already paid). It is not in dispute that QIC has now paid this sum to the Bank.
QIC’s claim on the reinsurance
21. As noted above, the non-US owned insurers in due course paid QIC their proportion of the loss under the relevant Reinsurance Contracts.
22. However, the Claimants have all refused to indemnify QIC. They rely on the Sanctions Clause in the Reinsurance Contracts.
23. The Claimants issued the present proceedings on 1 November 2022. A challenge to the jurisdiction made by QIC was rejected by the Court which held that the Court had jurisdiction under Article 5(A)(2) of the Judicial Authority Law.
The issues
24. The Claimants seek declarations that (a) they are not deemed to have provided cover under the various reinsurance contracts concluded with the Defendant and (b) have no liability to pay the claims asserted against them under those contracts. They base their case on the Sanctions Clause incorporated into each of the reinsurance contracts; and they rely upon (i) the fact that they are all US or US owned persons and that the ultimate beneficiary of the proceeds paid under the underlying policy is owned by three individuals who are Iranian nationals; (ii) relevant provisions of US sanctions legislation; and (iii) expert evidence from a US lawyer as to the effect of these provisions.
25. The Defendant contends that the Claimants are not entitled to the declarations sought. They contend that the Claimants are not exposed to any sanction, prohibition or restriction under the US sanctions regime; and they counterclaim for the sums due to them under the reinsurance contracts. There is no dispute about quantum, so it is common ground that if the sanctions defence fails the defendants are entitled to judgment for the sums claimed (which are set out in the “Defendant’s Written Submissions for Trial” filed in process before the commencement of the Trial).
26. The dispute is as to whether the provision by the Claimants of cover and/or payment of the claim made by the Defendant would expose any of them to sanction, prohibition or restriction under the ITSR such that the Claimants can rely upon the Sanctions Clause in each of the Reinsurance Contracts. The Claimants submit that this can be sub-divided into two sub-issues, namely (a) the proper meaning and effect of the Sanctions Clause and (b) whether, as a matter of US law, the provision of cover or payment under the Reinsurance Contracts would expose the Claimants to any sanction, prohibition or restriction under ITSR. Although I did not understand there to be any dispute as to the meaning and effect of the Sanctions Clause it is perhaps useful to deal with it first as a discrete chapter.
The Sanctions Clause
27. I have set out the terms of the Sanctions Clause earlier in this judgment. The important part of the wording refers to a situation in which payment by the reinsurer of the claim “would expose that (re)insurer to any sanction, prohibition or restriction” under the laws or regulations of, amongst others, the USA. The question is: what is meant by the word “expose” in in the context of a payment exposing a (re)insurer to a sanction? It might be argued that that contingency would be satisfied if the payment by the (re)insurer, albeit not actually prohibited as a matter of law, “exposed” the (re)insurer to sanction, in the sense of putting the (re)insurer at risk of being sanctioned, albeit wrongly.
28. Such an argument was considered and rejected by Teare J inMamancochet Mining Limited v Aegis Managing Agency Ltd & ors [2018] EWHC 2643 (Comm) at paras. 46- 50. I quote those paragraphs below:
“46. One can be ‘exposed’ to a sanction (in the sense of being laid open to a sanction or left without protection from a sanction) or ‘exposed’ to the risk of being sanctioned (in the sense of being subject to the risk of a sanction). The present clause does not refer in terms to being exposed tothe riskof a sanction or prohibition. It refers to a payment which ‘would expose’ the insurer ‘to any sanction, prohibition or restriction’.
47. It is necessary to understand what must happen before a sanction is imposed, since that is the context in which the sanctions clause must be construed. Before a sanction can lawfully be applied there must be conduct which is prohibited. Further, when there is prohibited conduct the agency charged with the application of sanctions may or may not decide to penalise the prohibited conduct with a sanction. That suggests that it is necessary for the insurer to show that the payment of the claim in question would be conduct which was prohibited by the applicable laws or regulations. If that is shown then the insurer can fairly be said to be laid open to a sanction, to be at risk of a sanction, or to be left unprotected from a sanction. If that is not shown, then it cannot be said that the insurer is laid open to a sanction, or at risk of a sanction, or left unprotected from a sanction. For unless the conduct is prohibited, in law there can be no sanction.
48. The argument advanced by counsel for the Defendants was that it was sufficient to show that there was a risk that the agency in question might conclude that there was prohibited conduct (when in law there was not or may not be) and so impose a sanction. If that had been the intention of the parties I would have expected them to have made such intention clear, perhaps by referring in terms to ‘exposure to the risk of being sanctioned’, or to ‘conduct which the relevant authority might consider to be prohibited’.
49. Another aspect of the context in which the present issue arises for decision is that it concerns an insurer’s liability to pay a claim pursuant to a contract of marine insurance. Whilst an insurer might welcome a clause which entitles him to decline to pay an otherwise valid claim when there was merely a risk that payment might be considered to be prohibited, one would expect that an assured would only be willing to agree that the insurer was not obliged to pay an otherwise valid claim where the insurer was prohibited in law from paying– rather than where there was merely a risk that the relevant authority would (perhaps wrongfully) impose a sanction on the insurer. These considerations suggest that clear words would be required to establish a common intention that the insurer need not pay an otherwise valid claim where there was merely a risk that payment would incur a sanction, without having to show that payment was prohibited as a matter of law.
50. Having considered the opposing arguments I have concluded that the language and context of the clause show that the meaning of the clause which would be conveyed to a reasonable person is as follows. The clause provides that the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus ‘would expose’ the Defendants to a sanction.”
29. It has already been determined in this case that the governing law of the Reinsurance Contracts is the law of the DIFC. But I see no reason to suppose that DIFC law on this issue differs from the law of England. I would adopt the reasoning of the judge in that case.
30. Accordingly, the question I have to decide is whether payment by the Claimants to QIC under the various Reinsurance Contracts is prohibited as a matter of US law. I am not concerned with the question of whether they would in fact be sanctioned for making such payments if such payments were prohibited, or whether they could escape such sanction by negotiation or in some other way. Nor for that matter am I concerned with the question whether they might be (wrongly) threatened with sanction, even to the extent of having proceedings brought against them, in circumstances where such payments were not in fact prohibited.
US sanctions against Iran
31. The general structure of the US sanctions regime against Iran was not in dispute. I take the following brief summary from the first Expert Report of Mr David James Letham Mortlock, the expert called by the Claimants. He explained that the US Department of the Treasury, Office of Foreign Assets Control (“OFAC”) administers and enforces US sanctions. OFAC is empowered to enforce U.S. sanctions issued under various statutory authorities, including the International Emergency Economic Powers Act (“IEEPA”), which underpins U.S. sanctions against Iran. OFAC primarily administers US sanctions against Iran through the Iranian Transactions and Sanctions Regulations (“ITSR”) at 31 C.F.R. Part 560, which generally prohibit US persons from exporting services to Iran, including where the benefit of such services is received in Iran. Separately, the ITSR also generally prohibit US persons from facilitating the export of services to Iran by non-US persons. Non-US entities owned or controlled by US persons are generally subject to the same prohibitions involving Iran that apply to US persons.
The Iranian Transactions and Sanctions Regulations: 31 CFR Part 560 (“ITSR”)
32. It is convenient to set out the provisions of ITSR so far as are relevant to the present dispute.
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Ҥ560.204 Prohibited exportation, reexportation, sale, or supply of goods, technology, or services to Iran.
Except as otherwise authorized pursuant to this part... the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, reexportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that:
(a) Such goods, technology, or services are intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran; or
(b) ...”
The application of this paragraph, so far as concerns insurance, is made clear in§560.427 Exportation, reexportation, sale or supply of financial services to Iranor the Government of Iran, which provides inter alia that the prohibition on the exportation, reexportation, sale or supply of financial services to Iran or the Government of Iran contained in §560.204 applies to the provision, directly or indirectly, to Iran or the Government of Iran, of insurance services.
Further clarification is given by§560.410 Provision of services,which explains that the prohibition in §560.204 applies to services supplied or performed by a US person to a person in a third country, where the benefit of such services is otherwise received in Iran.
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Ҥ560.208 Prohibited facilitation by United States persons of transactions by foreign persons.
Except as otherwise authorized pursuant to this part, and notwithstanding any contract entered into or any license or permit granted prior to May 7, 1995, no United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States.”
This paragraph is amplified by§560.417which gives non-exhaustive examples of what is covered by a prohibited facilitation or approval of a transaction by a foreign person. This provides as follows:
Ҥ560.417 Facilitation; change of policies and procedures; referral of business opportunities offshore
With respect to §560.208, a prohibited facilitation or approval of a transaction by a foreign person occurs, among other instances, when a United States person:
(a) Alters its operating policies or procedures, or those of a foreign affiliate, to permit a foreign affiliate to accept or perform a specific contract, engagement or transaction involving Iran or the Government of Iran... where such transaction previously required approval by the United States person and such transaction by the foreign affiliate would be prohibited by this part if performed directly by a United States person or from the United States;
(b) Refers to a foreign person purchase orders, requests for bids, or similar business opportunities involving Iran or the Government of Iran to which the United States person could not directly respond as a result of the prohibitions contained in this part; or
(c) Changes the operating policies and procedures of a particular affiliate with the specific purpose of facilitating transactions that would be prohibited by this part if performed by a United States person or from the United States.”
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Ҥ560.215 Prohibitions on foreign entities owned or controlled by US persons.
(a) Except as otherwise authorized pursuant to this part, an entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States.”
Paragraph (b) provides that for the purpose of paragraph (a), an entity is “owned or controlled” by a United States person if that person (i) holds a 50% or greater equity interest in the entity’ (ii) holds a majority of seats on the board of directors of the entity or (iii) otherwise controls the actions, policies or personnel decisions of the entity. Insofar as not a “US person” (as defined at §560.314 of ITSR), each of the Claimants falls within this definition of being “owned and controlled” by a US person. That paragraph also makes it clear that a company such as Alpine, which is owned by persons ordinarily resident in Iran (the three Iranian nationals), falls within the definition of a person who is “subject to the jurisdiction of the Government of Iran” for the purpose of the prohibition.
Expert evidence and other material
33. Both parties adduced expert evidence of US law. The Claimants called Mr Mortlock (mentioned above). The Defendant called William Edward Lawler III. The expert witnesses each produced two expert reports and, having met, produced a Joint Report identifying points of agreement and disagreement.
34. In the course of closing submissions I was reminded, under reference toMamancochet Mining Limited v Aegis Managing Agency Ltd(supra) at para 56, that when experts give different views as to the meaning of and interpretation to be given to the relevant paragraphs of the Iran Sanctions Regulations, the court has to decide between their conflicting testimony. While the court’s decision as to foreign law is a finding of fact, “it is a finding of fact of a ‘peculiar kind’, one in respect of which, where appropriate, the court is entitled to exercise its own judgment; seeDexia Crediop SPA v Commune di Prato [2017] EWCA Civ 428 at paragraphs 34-42.” Counsel for the Claimants submitted that if neither expert supported a construction which appeared to me to be “pretty obvious”, I was entitled to use my own judgment on the point, particularly where, as here, I was dealing with a common law system with which the court had some familiarity, rather than a civil law system. I accept that submission.
35. Mr Mortlock, the Claimants’ expert witness, is an attorney admitted to the Bar in Washington DC; and is a partner and Chair of the Global Trade and Investment Group at the law firm of Willkie Farr & Gallagher LLP. In his practice, he deals primarily with compliance with US economic sanctions and the implementation and enforcement of sanctions by US government authorities. From October 2013 until November 2015, he was Director for International Economic Affairs for the White House National Security Council, where he was responsible for coordinating the US Government’s implementation of economic sanctions and other programmes. Earlier in 2013, he was Deputy Coordinator for Sanctions Policy; and before that, from mid 2009 until January 2012 he was the Attorney-Advisor for Sanctions and Terror Finance.
36. Mr Lawler, the Defendant’s expert witness, comes from a different legal background. He is a partner in the law firm of Blank Rome LLP in Washington DC. He has been in practice just short of 40 years. He is currently co-chair of his firm’s White Collar Defence & Investigations Practice Group. His practise focuses on government enforcement actions and his client’s response to and interactions with them. Areas of practice include foreign corrupt practises and international economic sanctions regimes, money laundering, criminal antitrust, public corruption and other white collar crime. He generally acts for defendants and others subject to US Government investigations and enforcement actions. He is an active trial lawyer, having taken more than 70 jury cases to verdict and conducted hundreds of grand jury and motions proceedings. In his early years, before joining private practice, he served as the assistant US Attorney for the District of Columbia.
37. It was submitted on behalf of the Claimants that Mr Lawler’s experience could not match that of Mr Mortlock. Mr Mortlock is, and has always been, right at the heart of the US Government’s sanctions regime – that is true of his practice now and was true also of his time within the US Government where he was intimately involved with the coordination and implementation of economic sanctions. By contrast, although he does act in sanctions matters, Mr Lawler’s experience in the area of economic sanctions is, inevitably perhaps, neither as intimate nor so extensive as that of Mr Mortlock. His practice is mainly defence work – both advisory and in litigation – as is illustrated by his impressive list of criminal jury trials taken to verdict; and as a defence lawyer, so it was submitted, he is forever seeking ways to say that the sanctions do not apply.
38. There is some force in the Claimants’ submission. Mr Mortlock is more deeply embedded in the sanctions regimes and how they are interpreted. But ultimately the issue is as to the meaning of various paragraphs in the sanctions regime; and although Mr Mortlock can speak with authority on the aim of the relevant regulations I do not consider that this gives him a significant advantage over Mr Lawler when it comes to construing the legislation. Ultimately what matters is the quality of the evidence and the cogency of the arguments advanced by each witness.
39. Having said that, it is right also to say that I did not find the evidence of either of the experts altogether satisfactory. This was partly as a result of the late introduction into the Claimants’ case of the “facilitation” argument (see below), which interrupted the structure and cohesion of the expert evidence and the way it was presented. But it was not only this. I am satisfied that both experts were doing their best to assist the court. However, Mr Lawler, for the Defendant, appeared at times not to have fully thought through the issue upon which he was being questioned - perhaps understandably given the shifts in the Claimants’ case - and would tend to go along with the suggestions put to him in cross examination, but then would not follow that through but instead would dig in his heels and resist the conclusion which appeared to follow from those suggestions and his answers to them. By contrast, Mr Mortlock was forceful and assertive in his evidence, rather too much so in my view given the nature and opacity of the published material to which he spoke. He would often say, under reference to a particular OFAC report of a settlement with a US company (as to which see below) that in that report OFAC had “stated explicitly” or “explicitly acknowledged” that such and such was the case, or that OFAC guidance “makes [that] clear”, when on a careful look at the published material in the course of cross examination it was apparent that that was simply not the case. He also tended to answer questions put to him in cross- examination by stating what he said was OFAC’s position whereas, as I had to explain to him (and for the reasons more fully explained below), I was interested in his views rather than those of OFAC.
40. One of the problems faced by this court in reaching a conclusion on the legal issues is the absence of any judicial interpretation of the sanction legislation in the form of court judgments at first instance or at appellate level. The vast majority of OFAC’s enforcement actions end in a settlement or are otherwise resolved without a decision of the court. In the course of giving their evidence, and in their expert reports, both experts referred to and were asked about published guidance by OFAC in the form of “FAQs” and published settlements between OFAC and US persons where the US person agrees to pay a financial penalty without any admission of liability. The reports of settlements set out the basic facts, though often only in outline, but often there is little or no analysis of the regulation or of how the facts show a contravention of the regulation.
41. By definition, a settlement is reached as a compromise: a settlement agreement does not indicate that the settling party would have been held liable in court but only that it considered itself at risk of being held liable and, possibly, wanted to put itself in a favourable position to negotiate the amount of any fine. As was submitted on behalf of the Defendant, the problem with relying upon such materials to assist in the understanding of US sanctions law is that they are not decisions of a US court, nor are they reasoned in the way that a judgment would be reasoned. They evidence only the views of OFAC, not necessarily the views of the US courts. InMamancochet Mining Limited v Aegis Managing Agency Ltd(supra) at para 56 Teare J records an agreement between the US law experts in that case to the effect that a US court would have regard to the plain meaning of the regulation and also to guidance issued by OFAC. I am sure this is right, though in the present case neither expert put it in precisely those terms. I was told by counsel for the Claimants, in the course of his closing submissions, that the courts in the United States “will defer to OFAC’s interpretation unless it is plainly erroneous”; but in my view that submission goes too far. Neither expert witness gave evidence to that effect, not even Mr Mortlock, who was presented with a perfect opportunity to do so when I intervened to tell him that I was interested in his views on the legislation, not those of OFAC. Absent evidence to support it, I cannot accept that submission.
42. OFAC’s views are, of course, entitled to the greatest respect, but it is not neutral on issues of alleged sanctions violations. OFAC is an enforcement agency. I was told that it has an aggressive enforcement approach to perceived sanctions contraventions, which might encourage settlement even when there was a potentially live issue as to whether there was in fact a breach. It was also suggested to Mr Lawler in crossexamination, though I am not sure he agreed with this, that OFAC tends to have an expansive view of the interpretation of the sanctions regulations; if so that would make it all the more critical to have regard to the regulations themselves rather than simply accepting OFAC’s interpretation of them.
43. There is, therefore, in my view, a danger in relying too heavily on OFAC’s opinions and the terms of the various settlements between OFAC and US or US owned companies – certainly they give an indication of circumstances in which a US company has considered itself to be at risk of being found to have acted contrary to the sanctions regime, and of the circumstances in which OFAC has asserted that to have been the case, but ultimately that only tells one about the circumstances in which a company would consider itself to be at risk of sanction, which is not the question. The question for this court is not whether the Claimants would be at risk of sanction if they paid the claim; it is whether payment is prohibited as a matter of law: seeMamancochet Mining Limited v Aegis Managing Agency Ltd(supra).
44. OFAC sometimes issues advisory opinions to parties who seek its advice as to whether a particular course of action would be unlawful without the authorisation of OFAC. Mr Mortlock relied upon one such advisory opinion in his report. His evidence, however, was that they will not always do so; and if they agreed to do so the process might be very slow. It was suggested on behalf of the Defendant that the Claimants ought to have requested an advisory opinion from OFAC; failure to request such an opinion might be taken to reflect a concern on the part of the Claimants that OFAC would confirm that payment under the reinsurance contracts would not breach the sanctions regime. While it might have been helpful to have OFAC’s opinion on this matter, ultimately it would only be their opinion. It would not be conclusive. It seems to me, in any event, that it would be going too far to draw any inference either way from the Claimants’ failure to take this step; and an inference that the Claimants had such a concern, if such an inference were to be drawn, would be of no probative or other value in this litigation for the reasons just set out.
Expert agreement and disagreement
45. As appears from their Joint Report, the experts are agreed that:
(a) the Claimants are generally subject to the same prohibitions under ITSR as US persons – each of the Claimants is either a US person or is owned and controlled by a US person.
(b) ITSR prohibits the export of services to Iran directly or indirectly by a US or US owned person.
(c) ITSR prohibits the export of services by a US or US owned person to a third country where the benefits of those services are received in Iran.
(d) TSR prohibits the export of reinsurance services to Iran by a US or US owned person where the benefits of the reinsurance are received in Iran.
(e) ITSR prohibits the facilitation by US or US owned persons of activities by foreign third parties that could not be performed by US persons themselves.
46. However, the experts disagree as to whether coverage under the Reinsurance Contracts or a payment made thereunder is prohibited. In particular, they disagree on:
(a) whether the benefit of the reinsurance cover or any payment by reinsurers would be considered to be received by an Iranian-owned person and its Iranian owners; and
(b) whether the Reinsurance Cover would be considered to facilitate business with an Iranian-owned person and its Iranian owners.
The Claimants’ case in summary
47. In what follows, I focus on the Claimants’ case because, as was common ground between the parties, the burden is on the Claimants to prove, on balance of probabilities, that they would be subject to sanction if they were to pay the sums demanded of them by the Defendant.
48. The case advanced by the Claimants in their pleadings (para. 21 of the Particulars of Claim) and in Mr Mortlock’s expert reports was that the Claimants are prohibited from providing cover under the Reinsurance Contracts and from making payments under the same because any such payment:
(a) would be in respect of insurance services provided indirectly to Iran; and/or
(b) would constitute the transfer of funds indirectly to Iran;
contrary to §560.204 of the Regulations as amplified by §560.410 and §560.427.
49. In his first expert report, Mr Mortlock did not appear to support the case that payment of the reinsurance claim would constitute the indirect transfer of funds by a US or US owned person to Iran. But when cross-examined about this he was not keen to let the point go altogether. He did not disagree with it, so he said, because payment of the claim “is acknowledging that the coverage exists, which would be a collectively prohibited course of events”.
50. As I understood his evidence, Mr Mortlock’s main point was that the mere existence of the reinsurance cover enables the Defendant to offer insurance cover to the Bank and thereby facilitates the business activities of the Defendant, of the Bank and, importantly, of its customers, including Alpine, regardless of any payments being made under the reinsurance itself. This is, as I understand it, the facilitation claim introduced in Mr Mortlock’s first report at para.32 onwards. I quote:
“[the reinsurers] are prohibited from facilitating QIC’s provision of insurance services where the benefit is received in Iran.” (Mortlock 1st report para 32)
“[the reinsurers] would be prohibited from reinsuring any activity that would be prohibited if performed by a US person, including facilitating the export of insurance services to Iran by QIC or facilitating the payment of reimbursement of Alpine by the Bank where the benefit was received in Iran.” (ibidpara 34)
As Mr Mortlock explained in cross-examination,
“OFAC has made clear that is not just whether the payment of the claim, whether those funds are benefitting the insured and its business partner, but whether the coverage exists to support the activities of the insured and its business partner.”
He agreed with counsel for the Defendant that, on his case, “payment has got nothing to do with anything, it’s merely the existence of the coverage which is the breach of sanctions.”
51. I shall refer to this line of argument as the “facilitation” argument. It is argued that the reinsurance arrangements fall foul of §560.208 and §560.417 of the Iranian sanctions regulations. Although this argument has never been part of the Claimants’ pleaded case, counsel for the Defendant did not suggest that the point should not be allowed to be argued; and the facilitation argument therefore falls to be considered on its merits.
Discussion - overview
52. As in many cases, the complexity of the arguments is apt to disguise the essential simplicity of the underlying facts and the issues to which they give rise.
53. The basic facts are not in dispute. The Defendant, QIC, provided insurance cover to the Bank, insuring it against, amongst other things, the criminal acts of its employees. That insurance was for the benefit of the Bank, in case it suffered loss, not of its customers, who were not covered under that policy against any loss they might suffer and did not benefit directly or indirectly from the insurance taken out by the Bank. The Bank’s customers may, of course, have had their own insurance, but that is irrelevant for present purposes. Just to be clear: the obligations owed by the Bank to its customers are not affected in any way by the fact that the Bank had insurance with QIC. As Mr Mortlock accepted, the Bank was liable to re-credit Alpine’s account after the fraud was discovered regardless of whether or not it had insurance.
54. The Defendant, QIC, reinsured those risks with a number of reinsurers, including the Claimants. The Bank did not benefit from the reinsurance – the reinsurance was for the benefit of QIC, the Defendant, and only for their benefit – nor did any customer of the Bank, such as Alpine, benefit directly or indirectly from the reinsurance.
55. The Bank suffered loss through the criminal acts of its employees. I shall consider below how the Bank came to suffer that loss, but for present purposes what matters is that it was that loss sustained by the Bank for which it claimed on its insurance with QIC; and it is for that loss that QIC have paid out under the original policy. QIC have made payment to the Bank and to the Bank alone – they have not paid anything to any of the customers of the Bank, including Alpine, either directly or indirectly.
56. It follows that, just as payment by the Defendants to the Bank will be payment to the Bank and no one else, so also any payment made by the Claimants and the other reinsurers in response to the claim by the Defendant will be a payment to the Defendant and only to the Defendant. According to Mr Lawler, whose evidence I accept on this point, OFAC would consider the benefit of the reinsurance cover to be received by the Defendant, QIC, in the UAE. OFAC would not regard it as a benefit or payment to the Bank, whether directly or indirectly, still less as a payment or benefit to the Bank’s customer, Alpine.
57. Even if, contrary to the foregoing, it was arguable that the payment by QIC was a payment indirectly to Alpine, which it is not, there is no basis for the suggestion that that payment was a payment to Iran. Alpine is a Hong Kong company, albeit its shareholders are Iranian nationals permanently resident in Iran. There was no evidence to justify any inference that Alpine would remit any monies to Iran. If one were to speculate, which of course one must not do, one might think that remitting monies to Iran would not be the obvious thing for Alpine or its shareholders to do.
The Bank’s loss
58. In the course of the Trial, there was some discussion about how the Bank came to suffer the loss in respect of which it then made a claim against QIC. This is an important issue.
59. Factually, the position is not difficult to understand, though some of the details are rather opaque. A Bank employee colluded with a third party and, by use of a company with a similar name to that of Alpine, they managed to persuade the Bank to transfer out to them, or to that company and then out to them, the sum of over AED 36 million standing to the credit of Alpine in its account with the Bank. It is not entirely clear whether the money was transferred initially to the company with a similar name to Alpine and then withdrawn from the Bank, or was simply withdrawn directly from Alpine’s account. But nothing turns on that.
60. There is some debate, however, about the legal mechanism by which the Bank itself suffered the loss for which it claimed against the Defendant under the original insurance.
61. One possible view is that the money was stolen from Alpine; and that the Bank suffered a loss in a similar amount by reason of its obligation to reimburse Alpine. In the actions in Dubai between the Defendant and the Bank, the Court of Cassation summarised the relevant circumstances and narrated that the Bank was liable towards Alpine for all the amounts embezzled by the Bank employee “under the rule of bearing the sponsor-subordinate liability for their acts” according to the translation filed in court. I take this to be equivalent to the principle of vicarious liability in English law, the Bank being liable to reimburse Alpine because the loss to Alpine was caused by the acts of a Bank employee for whose actions the Bank was vicariously liable. On this analysis, therefore, it was Alpine that suffered the loss in the first instance before it was reimbursed by the Bank – the Bank’s loss arose as a result of it having to reimburse Alpine.
62. If that were the right analysis, it would provide a link of sorts between the loss and Alpine, in that it would be Alpine who suffered the original loss before that loss was made good by the Bank. But it would not alter my view, set out above, that payment by the Defendant under the original insurance was payment to the Bank and not to anyone else, whether directly or indirectly.
63. However, there is, in my opinion, a better analysis of the situation. In English law, and under the law of the DIFC, the relationship between a bank and its customer is a relationship of debtor and creditor, who is debtor and who is creditor depending upon whether the account is in credit or debit. On the assumption that Alpine’s account was in credit to the extent of something over AED 36 million, Alpine was a creditor of the Bank for this sum. UAE Law is to similar effect: see Art. 371 of the UAE Commercial Transactions Law. But this does not mean that it was Alpine’s money that was taken – it is not as though Alpine had deposited bags of gold or banknotes with the Bank. In perpetrating the fraud using Alpine’s account, without Alpine’s authority or consent, the fraudsters will have made it appear that they were withdrawing sums standing to the credit of Alpine. But they were not taking Alpine’s money. Under the guise of being entitled to operate Alpine’s account, they persuaded the Bank to give them AED 36 million. The true state of indebtedness between the Bank and Alpine remained the same, albeit that fact was temporarily disguised by the appearance of Alpine having withdrawn that amount and, no doubt, this purported withdrawal being reflected in Alpine’s Bank statement. It was the Bank which suffered the loss, having paid out AED 36 million to the fraudsters in the mistaken belief that it was authorised by Alpine to debit its account with this sum. On this view, which in my view correctly reflects the true legal position, Alpine have never suffered a loss; and the adjustments that were made subsequently were, in effect, merely a correction of the recorded state of its account with the Bank.
64. On this basis, there is no question of any payment made by QIC to the Bank in respect of its loss being a payment, directly or indirectly, to Alpine. Nor is there any question of any payment by the Claimants under the reinsurance being a payment directly or indirectly to Alpine. Alpine is not, to borrow an expression in the Loss Adjuster’s Report, “the ultimate beneficiary of any claim paid”.
The OFAC material
65. I do not propose to refer in detail to all of the OFAC material which I was shown in the course of cross-examination of the expert witnesses. I have already mentioned the difficulties inherent in the use of such materials. In addition, however, one problem is that the summaries of the circumstances of each case are often very brief. In some cases (such as the HCC and Wells Fargo cases, dealt with under §560.208, facilitation, and the BNPP case, dealt with under §560.204) they give the precise paragraph of the Regulations said to have been breached. In others (such as the settlements involving AON, Steamship Mutual and SCB) and in FAQ 643 there is a reference to §560, showing that it is concerned with Iranian sanctions, but nothing else to explain what particular paragraph of the regulation is being invoked. Mr Mortlock cited the AON and Steamship Mutual settlements as raising issues under §560.208, and he may well be correct, but the text does not show that to be the case. The same applies to the OFAC advisory opinion concerning whether GEM Dubai could transfer funds to a Californian corporation; no specific part of the regulation is invoked. Other settlements (Generali - Cuba) and FAQs (FAQ 1059 - Russia) concern other sanction regimes where the terms are different. Other FAQs, although dealing with Iran, do not identify the specific regulation. This makes analysis difficult.
66. What one can say with some confidence is that in most cases where settlement has been reached on the basis that the insurance cover contravened the sanctions regime the activities complained of have had an obvious and direct link with Iran. In the AON settlement, the underlying insurance and reinsurance covered construction risks associated with a petroleum project on Kharg Island in Iran. In the HCC case, the offending cover was hull cover for aircraft operating in Iran. In the Steamship Mutual settlement, the insurance was of vessel operations involving NIOC (the National Iranian Oil Company). In the SCB case the conduct concerned Iran-related accounts and involved services provided directly to persons in Iran. In the BNPP case the company was part of a network of companies, four of which were incorporated in Iran, that comprised an Iranian energy group owned and controlled by an Iranian citizen ordinarily resident in Iran: BNPP were processing a huge number of payments by a company which it knew to be actively involved in selling and transporting petroleum products from Iran, and was deliberately concealing the company's relationship with Iran.
67. All these cases clearly involved prohibited activities directly concerning Iran. By contrast, in the present case, the reinsurance is of a Qatari insurer, and the insurance underwritten by the Qatari insurer is for a Bank carrying on business in Sharjah. There is no suggestion that the Bank specialised in dealing with Iranian owned companies or projects. Alpine was only one of no doubt thousands of customers of the Bank. It is, to my mind, stretching the analysis to breaking point to draw parallels with this case.
The specific arguments for the Claimants
68. Having set out this overview of the position as I see it, and referred in general terms to the OFAC material, I turn to consider the arguments advanced by the Claimants.
69. Before looking at the particular Regulations, I should note one point made by counsel for the Claimants. He submitted, under reference toMamancochet Mining Limited v Aegis Managing Agency Ltd(supra) at para.76 that the effect of the Sanctions Clause is not to make all cover void or ineffective because there is involvement by a sanctioned entity. Rather, the exclusion is expressly limited to that part of the cover or payment of a claim which would expose the reinsurers to sanction. He submitted that there was no cover for sanctioned activity and no liability to pay any claim arising from sanctioned activity. But that was as far as it went. What the exclusion does is to carve out from the cover that little bit of activity which is sanctioned, but leaves the rest of the cover intact. In other words, it simply cuts out the particular customer, Alpine, and any loss that might be suffered by that customer, from the scope of overall cover given to Bank.
70. I have no difficulty with the generality of this submission. It makes the consequence of any potential infringement of the Sanctions Regulations less extreme. But it confirms the position set out above. If on a proper analysis it was the Bank and not Alpine who suffered the loss (see paras.63-64 above), then the present claim is not in any respect a claim in respect of a loss suffered by Alpine, and the Sanctions Regulations do not provide the Claimants with a reason to avoid payment of the Claim.
§560.204 of the Regulations
71. It is the Claimants’ pleaded case (i) that the reinsurance would be in respect of insurance services provided indirectly to Iran and/or (ii) that payment of the claim would constitute the transfer of funds indirectly to Iran. The second line of argument (viz. transfer of funds indirectly to Iran) was not supported by Mr Mortlock or relied on by counsel for the Claimants, so I say no more about that but concentrate instead on the argument concerning the indirect provision of insurance services to Iran.
72. I have said enough in the preceding paragraphs to make it clear that that argument must fail. In short, summarising what I have already said, the Claimants are reinsuring a Qatari insurer, who in turn is insuring a UAE based Bank. One of the Bank’s customers (among many) happens to be Alpine, a Hong Kong company, and the only connection with Iran is the nationality and place of residence of its shareholders. The Claimants are not providing insurance services either directly or indirectly to Alpine.
73. Counsel for the Claimants submitted that there were three questions to answer in respect of the Claimants’ reliance on this paragraph of the Regulations: (i) what is the service being provided to the insured or reinsured, i.e. what is the activity being insured or reinsured; (ii) does that service provide any benefit directly or indirectly to the customers of the insured; and (iii) if the customer is Iranian owned, does that make it a sanctioned entity; so that the service being provided by virtue of the reinsurance is prohibited? He submitted that the service being provided was insurance and reinsurance; and regardless of payment in the particular case, insurance or reinsurance provided a benefit directly or indirectly to the customers of the insured, including Alpine, an Iranian owned company. The reinsurance cover was therefore prohibited and therefore payment of the claim was prohibited.
74. I have no difficulty in approaching the matter in these stages. I agree that the service being provided by the Claimants was reinsurance, and that the service being provided by QIC, the insurer, was insurance. But in my opinion that does not take the argument anywhere. For the reasons set out above, I do not accept that the reinsurance provides a benefit, directly or indirectly, to the Bank; nor do I accept that the insurance provided by QIC provided a benefit, directly or indirectly, to any customer of the Bank.
75. Counsel for the Claimants referred to the OFAC report of its settlement with HCC in support of his argument that the enquiry does not simply stop with the immediate customer. That was a case where HCC, the wholly owned insurance subsidiary of a US company, participated in a specialty aviation insurance policy covering commercial flight operations in Iran. More specifically, HCC participated in the hull portion of an aircraft hull and liability insurance placement by a foreign insurance broker that insured a foreign-owned commercial airline that leased aircraft to an air charter company operating in Iran. It was submitted on behalf of the Claimants that that case made it perfectly clear that you look to the underlying commercial transaction or the activity, the economic activity, between the insured and the various entities with which it engages in its business. The insurance indirectly benefitted all entities in the chain of operations. That is correct on the facts of the case. But the submission fails, in my opinion, to take into account the direct and known chain of activities linking the initial insurance and the activities down the line. The report of the settlement is not easy to unravel, but as I understand it there was a direct line of insurance cover provided by HCC ultimately insuring the air charter company operating in Iran; and it was known to HCC that part of the underlying purpose of the insurance in which it participated was to cover aircraft operating in Iran. That is far removed from the present case where the underlying insurance is of the UAE Bank, there is no insurance chain linking the insurance and reinsurance to any customer of the Bank, and there is nothing to suggest that QIC knew of the identities of the Bank’s customers or of any links any of them might have had to Iran.
76. Counsel also referred to the Wells Fargo settlement. There Wells Fargo and its predecessor (“Wachovia”) provided a foreign bank located in Europe with software that the foreign bank then used to process trade finance transactions with a sanctioned jurisdiction and sanctioned persons. At the direction of a mid-level manager, Wachovia customised a software platform for general use by the European bank, but which it knew or should have known would be used to facilitate trade finance transactions with sanctioned jurisdictions and persons. The European bank then used the platform to manage such transactions; and Wells Fargo did nothing to stop the use of the software platform for these purposes despite concerns being raised internally on multiple occasions. It was submitted on behalf of the Claimants that this showed both the provision of services (the software) and the benefit conferred on the customers down the line - you look at the economic activity engaged in by the person to whom the relevant services have been provided in order to ascertain whether they benefit indirectly from the service. However, what is clear from the report of the settlement is that considerable weight was placed on the fact that Wells Fargo and Wachovia both knew full well, or ought to have known, that the software was to be used for the purposes of transactions with sanctioned jurisdictions and persons. Such a consideration is entirely absent in this case.
77. In the course of his submissions, counsel for the Claimants drew attention to the scope of the insurance cover. He submitted that it went well beyond insuring against the criminal acts of the Bank’s employees. It included professional indemnity (PI) cover. It covered all kinds of property, including for example, gold medallions belonging to the Bank’s customer held in the Bank’s strong room at its Branch in Dubai. The breadth of the cover showed clearly that the cover conferred a benefit not only on the Bank but also on its customers. None of this was put to the expert witnesses when they gave their evidence about the effect of the Regulations, so the court did not have the benefit of hearing their evidence on these matters. Be that as it may, I do not see that it changes the analysis at all. Whatever the scope of the cover, it covers the Bank againstitslosses, using the term “losses” in the broadest sense of the work. Insofar as there might be a claim in respect of lost gold medallions or the like, this can be carved out of any cover (see para.69 above). But the fact remains that the insurance as a whole is for the benefit of the Bank and only the Bank and the reinsurance is for the benefit of QIC and only QIC.
78. The situation here is quite different from the HCC and Wells Fargo settlements, and indeed the OFAC settlements concerning AON, SCB and Steamship Mutual mentioned above. If one may be permitted to use an expression from the field of tort or delict, the present case, where the reinsurance reinsures a Qatari insurer, who insures a Bank carrying on business in Sharjah, whose many customers include a Hong Kong company whose shareholders are Iranian nationals, is simply too remote.
§560.208 of the Regulations – the Facilitation argument
79. I have summarised the argument above. In short what the Claimants, through Mr Mortlock, say is that the mere existence of the insurance and reinsurance cover tends to support the activities of the insured and its “business partner”, the so-called “business partner” for this purpose being Alpine (as well as, presumably, the whole range of other customers of the Bank). Mr Mortlock agreed with the following summary of his case: “the claimants merely by offering reinsurance coverage are facilitating a prohibited transaction contrary to §560.208 of ITSR”. When asked what the prohibited transaction was, he said: “providing banking services to an Iranian owned entity or insuring such services.”
80. Counsel for the Claimants suggested that in respect of this argument a two-stage analysis was appropriate. First, one looks to see whether a non-US person is providing services to a sanctioned entity. In this case, he submitted, it was clear that QIC was providing services to a sanctioned entity, Alpine, for the reasons already given; there was an indirect benefit received by Alpine from the insurance services provided by QIC. The Bank was also providing services - banking services - to a sanctioned entity, Alpine. Second, one asks whether a US person, here the Claimant reinsurers, were facilitating those prohibited activities. The answer, he submitted, was plainly: Yes. Without the reinsurance, as a fronting insurer, QIC could not provide the cover.
81. In support of this submission, reference was made to the OFAC report of its settlement with AON Energy. The case proceeded on the basis that AON, by brokering and placing facultative retrocession reinsurance on behalf of a European reinsurer with two European retrocessionaires, had facilitated the placement of coverage and the payment of premiums for facultative retrocession reinsurance that reinsured construction risks associated with a petroleum project on Kharg Island in Iran, all in breach of the Iran Sanctions regulations. I do not find that case to be of assistance. There is little if any reasoning in the report of the settlement, but from the facts as reported there is clearly a direct link between the activities of AON as brokers and the reinsurance of the risks in Iran. That is very different from the reinsurance of the underlying risk in the present case, where the insurers, QIC, are providing general insurance to a Bank, one of whose customers, amongst many, and without any suggestion that QIC was aware of this, happens to have links to Iran.
82. I have already considered, and rejected, the contention that QIC was providing services to a sanctioned entity, Alpine. That being so, the second question does not arise for decision. However, I should note that the submission that as a fronting insurer QIC could not have provided the cover without having the benefit of the reinsurance was not supported by any evidence. If it had been material to my decision I would therefore have rejected that submission.
83. It might be useful to ask what §560.208 of the regulations is intending to prevent. I approach it as a lawyer, not as an enforcement agency such as OFAC. The wording of the paragraph itself is instructive. It prohibits a US person from facilitating any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US person. The verb “facilitate” is used in the active tense. It means making something possible or easier. There must be a link - a causal link - between the action which facilitates and the activity which is facilitated. And it seems to carry with it an inference that that was the intention. So, it involves doing something deliberately so as to make something possible or easier.
84. That meaning is illustrated by the (admittedly non-exhaustive) examples given at §560.417. Sub-paragraph (a) talks of the US personalteringits position. Subparagraph (c) refers to the US personchangingits operating policies. What it seems to be endeavouring to prevent is a US person altering or changing its policies or procedures so as to enable a foreign affiliate to carry out activities which the US person would otherwise have wanted to carry out itself. Sub-paragraph (b) provides a good illustration. It postulates that a US company receives a request from an Iranian company to submit tenders for goods or services of a certain type. Under the existing sanctions regime, the US person could not respond to that request. What this paragraph is saying is that the US person cannot get around this prohibition simply by inserting a non-US person into the chain. Similar examples could be posited under reference to paragraphs (a) and (c). That is why the prohibition in sub-paragraphs (a) and (c) is against the US person changing or altering policies or procedures so as to enable a foreign subsidiary or affiliate to perform contracts which he himself, as a US person, is prohibited from performing.
85. If that is the correct way of understanding §560.208, when read with §560.417, that is a long way from the present circumstances. In the present case there has been no alteration by the Claimants of their operating policies or procedures, or those of any foreign affiliate so as to facilitate QIC’s insurance of the Bank or the Bank’s banking relationship with its customers, such as Alpine; nor has there been any attempt to refer prohibited business opportunities to a foreign person who is not caught by the sanctions regime.
86. In my opinion, for a facilitation case under §560.208 to succeed, it must be shown that the US person deliberately took steps to facilitate a transaction by a foreign person where such a transaction would be prohibited if performed by a US person. And in the circumstances of the present case, that must include showing (a) that the Claimants facilitated the provision of insurance services by QIC to the Bank, and also (b) that the insurance cover provided by QIC was apt to and did facilitate the Bank’s provision of banking services to Alpine. I emphasise that this must be done deliberately for that purpose, since this seems to me to be at the heart of the prohibition in this paragraph.
87. In my view, the Claimants do not bring themselves within this paragraph of the regulations at all. It cannot sensibly be contended that the Bank’s relationship with Alpine was dependent on or influenced in any way by the existence of the insurance or reinsurance cover. Nor can it credibly be suggested that the existence of the insurance or reinsurance was in any way critical to the Bank’s relationship with Alpine or its ability to reinstate Alpine’s account when the fraud was discovered and litigation had ensued. In addition, there is nothing to suggest any deliberate altering of position by the Claimants in arranging the reinsurance to avoid the prohibition on their own activities.
88. The Claimants’ facilitation argument also runs into difficulties if I am correct in my analysis (in paras.63-64 above) that what the fraudsters did in fact was steal the Bank’s money, not Alpine’s. On that hypothesis, Alpine did not suffer any loss; and they only feature in the narrative to the extent that their account details were used by the fraudsters to steal from the Bank. The position is the same as if the fraudsters had used the account of some other customer of the Bank with no connection with Iran. If, instead of using Alpine’s account, the fraudsters had used a UAE company’s account with the Bank to perpetrate their fraud, could the reinsurers resist payment on the grounds that there was an Iranian company among the Bank’s other account holders and that the reinsurance between them and the Bank facilitated a prohibited transaction? The answer to that is surely: No, and I do not think it was contended otherwise.
89. It was argued for the Claimants that payment to Iran or to an Iranian controlled company was not essential to attract sanction under the regulations concerning facilitation. But it is difficult to see how that works. In the above example of a UAE company’s account being used (unwittingly) to defraud the Bank, it was not suggested that payment of the claim by the reinsurers would be prohibited under the sanctions regime, even though there would in the background also be an account in the name of Alpine which would, on this argument, be contrary to facilitation provisions of the regulations. The same result must surely follow where Alpine has itself been used (equally unwittingly) as the vehicle for the fraud on the Bank. The issue does not arise in practice until focused on a proposed payment to Alpine in respect of a loss suffered by Alpine; and that is not this case.
90. In my opinion, this attempt to bring the case within the confines of §560.208 fails.
Disposal
91. For the reasons set out above, the Claimants’ claim fails. There will be judgment for the Defendant. It is agreed that in those circumstances the counterclaim succeeds.
92. I was provided with figures to insert into the order. But those figures will need updating to allow for the inclusion of simple interest up to the date of judgment. I see no justification for the award of compound interest. Judgment debt interest will apply thereafter.
93. I would be grateful if parties could endeavour to agree the figures. If for some reason the terms of the order cannot be agreed, the matter can be put back before me in writing or at a short hearing.
94. The Claimants must pay the Defendant’s costs of the action, to be assessed by the Registrar on the standard basis if not agreed.
